The second handbag war

Bags I this one

ON HIS way to creating the world's biggest luxury group and becoming the richest man in France, Bernard Arnault has made a career of swallowing grand, family-owned businesses. Over the years he has picked many a fight with founders of luxury firms, or their heirs, who were unwilling to sell. He also fought bitterly and unsuccessfully with François Pinault, his archrival, over the takeover of Gucci, an Italian fashion house. The French press called it the “handbag war”.

Three months ago Mr Arnault began what may become his longest, most spectacular takeover battle yet. At the end of October his group, Moët Hennessy Louis Vuitton (LVMH), announced that it had amassed a 17.1% stake in Hermès, a family-owned maker of silk scarves and expensive handbags. On December 21st LVMH said it had increased its stake to 20.2%.

Mr Arnault's offensive took the descendants of Thierry Hermès, a saddlemaker who founded the company in 1837, by surprise. LVMH built the stake through cash-settled equity swaps with three banks that dated back to 2008, when the luxury industry was in a deep crisis. The use of these derivative contracts allowed LVMH to skirt disclosure requirements and produced a nice profit for Mr Arnault, who had bet on Hermès's stellar rebound.

The five dozen heirs who own 73% of Hermès are not happy about the intruder. They want the company to remain independent and keep its tradition of craftsmanship, which they fear would be lost in a big, commercially minded group like LVMH. On December 5th the family said they would create a holding company into which they would put 51% of Hermès's shares. It would have the right to buy out any member wanting to sell his stake. This involves a financial sacrifice, since those who put their shares into the holding will surrender part of their dividends so they can be used to buy out other members.

Mr Arnault insists that his intentions are amicable. LVMH is aiming to be a supportive long-term shareholder of Hermès, and wants to contribute to the preservation of the group's Frenchness and its family-firm attributes. The family retorts that if his intentions were amicable, he would sell and go away. Patrick Thomas, the chief executive of Hermès, maintains that it does not need help or advice from LVMH, pointing out that Hermès shares have done better than those of LVMH since Hermès went public in 1993.

However united the Hermès heirs appear to be in their opposition to Mr Arnault, his prowling seems to have alarmed them, and it is conceivable that their united front may crumble. And to create the holding company they will need an exemption from having to make a mandatory tender offer for all shares from France's Financial Markets Authority (AMF). Colette Neuville, an influential French advocate of shareholder rights, has called on the AMF to block the family's move, arguing that it would put non-family minority shareholders at a disadvantage because the value of their shares would be reduced if a majority of the shares were locked up.

After Mr Arnault's latest swoop, only about 7% of Hermès's shares are traded on the stockmarket. Since the AMF has a duty to protect minorities' interests, the regulator may indeed block the plan.

“By continuing to buy, Mr Arnault piles up pressure on the family to delist Hermès, for which they may not have the wherewithal,” says Luca Solca, a luxury analyst at Bernstein Research. Or Mr Arnault may be playing a long game. Analysts at HSBC, a bank, say that he knows that he cannot take over Hermès without the approval of about 15 members of the fifth generation who are aged roughly 65-75; the analysts speculate that he is positioning LVMH for the succession of the sixth generation.

Bertrand Puech, chairman of Hermès and a family member, says the sixth generation is as committed to the continued independence of the maison as their forefathers were. But so were the heirs of Louis Vuitton, whose business became one of Mr Arnault's prize conquests.